The president of Argentina fired the head of the central bank for "misconduct" because he refused to hand over a portion of the central bank reserves in order to pay-down debt. this will be an important test for the independence of the central bank which may be one of the most credible institutions in the country. A judge on Friday reinstated the central bank head, Martin Redrado, and temporarily blocked the plan to use the reserves to pay-down debt.
There is both a political and economic issue in this fight. The political issue is whether the president by decree can take some of the central bank international reserves. The reserves would be used to pay-down high interest rate debt. The objective of paying down the debt is to regain access to international capital markets. The economic issue deals with how foreign debt will be paid down. The usual method would be to raise revenue for the pay-down through higher taxes or cuts in other spending. Since Argentina is running a budget deficit, the choices are limited. The objective of the decree would transfer central bank wealth to the government to make the pay-down without using taxes. Now it may make sense to use reserves which are only receiving a low interest rate to cut the cost of high deficit, but the international reserves are their to protect the currency from a sudden change. The size of the request was $6.5 billion out a reserve pool of $48 billion, but it would set a bad precedent.
Surprisingly, the market has not reacted stronger to this information. The situation is in a state of flux but it shows what can happen when sovereign debt problems become more difficult.
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